When a private mortgage is the right bridge, and when it is not

In Ontario, a private mortgage is a short-term loan from a private lender, used as a bridge when a bank or alternative lender cannot help yet. A private mortgage costs more than a bank mortgage in both interest and fees, and every cost must be disclosed to you in writing before you commit. A private mortgage only makes sense with a clear, realistic plan to repay it: moving back to a bank or alternative lender, or selling, before the term ends.

Start with the institutional route

For most households, the right starting point is a mortgage from a bank, credit union, trust company or monoline lender. If your situation does not fit those lenders' rules today, the next step is usually an alternative ("B") lender. An alternative lender is a lender outside the big banks that accepts less conventional income or credit at a higher cost.

A private mortgage comes after both the institutional and the alternative route. Private lenders are individuals or companies that are not deposit-taking institutions. Private lenders generally focus on the property and your equity, rather than on the full picture of income and credit a bank looks at.

Flexibility on income and credit is the reason private lenders exist, and the reason private lenders charge more.

How a private mortgage works, and what it costs

A private mortgage can be a first mortgage, or a second mortgage registered behind the one you already have. The term is short, and the lender expects to be repaid when the term ends, usually by a refinance with another lender or by a sale.

The costs of a private mortgage usually include:

• Interest, at a rate well above bank rates.
• A lender fee, charged by the private lender for setting up the loan.
• A broker fee, in many cases, because on a private mortgage the broker is often paid by the borrower rather than the lender.
• Legal and appraisal costs, including your lawyer and often the lender's lawyer.

In Ontario, every fee must be disclosed to you in writing before you commit. Look at the total cost in dollars over the term, not just the rate, and ask what happens if you need more time.

The plan to repay a private mortgage comes first

The most important question about a private mortgage is how you will get out of it, not the rate.

A good plan to repay a private mortgage is specific: it names what has to change, by when, and which kind of lender will take over. For example: "Once my second Notice of Assessment arrives in the spring, I expect to qualify with an alternative lender, and later a bank."

If you cannot describe in a sentence or two how you will repay a private mortgage, it is likely to become a costly holding pattern.

Plan for delays too. Renewing a private mortgage usually means paying fees again, and if you still cannot repay it at the next renewal, a sale may be the only way out. Before you sign, ask your broker to walk through what happens if your plan takes twice as long.

When a private mortgage fits

A private mortgage can be the right bridge when the problem is time, not affordability:

• A timing gap. You need to close before the money arrives from a sale or other source, and a bank cannot move on the timeline you need.
• Credit repair. A past problem, such as missed payments or a debt now being cleared, has hurt your credit, and a set period of clean history will let you qualify again.
• Income documentation catching up. You have recently become self-employed or changed how you are paid, the income is real, and the tax returns lenders need are not filed yet. Our article on what lenders look at for self-employed borrowers explains why two years of returns matter.

In each case the private mortgage buys time for something specific to happen, and the payments are affordable in the meantime.

When a private mortgage does not fit

A private mortgage is the wrong tool when:

• There is no plan to repay the private mortgage. If nothing about your situation will be different when the term ends, you will renew at private cost or have to sell.
• The private mortgage covers an ongoing shortfall. Borrowing against your home to pay monthly bills, without a change that ends the shortfall, uses up your equity.
• The payments are a stretch. A bridge you struggle to carry can make the problem it was meant to solve worse.
• A bank or alternative lender would say yes. If an institutional option exists, even with more paperwork or a longer wait, the institutional option usually costs less.

When the honest answer is to wait, pay down a debt or sell, we will say so.

How Stonefield Mortgage handles private financing

We arrange mortgages with banks, credit unions, trust companies, monoline lenders and alternative lenders. When a private mortgage is the right bridge, we refer you to Stonefield Capital, our private-lending brand, and we tell you about that connection up front.

A broker will explain the full cost in writing before you commit, and together we will set the plan to move back to a bank or alternative lender at the same time.

What to do next

If you think you may need a bridge, start with the plan to repay it: what needs to change, and by when. Then use our call-me-back form and we will look at the institutional and alternative options first.

We never ask for documents, your SIN or account numbers by e-mail. You can also read more about private mortgages as a bridge. All mortgages are subject to lender approval.